HIGH-TAX, HIGH-SPEND MODEL STILL DOES NOT WORK

May 26, 2010

State government finances are in bad shape because too many states went on spending binges in the early part of the decade when revenue was rolling in. However, the states did not leave enough in reserve to handle the collapse in revenues caused by the 2008-2009 recession, according to the latest edition of "Rich States, Poor States," published by the American Legislative Exchange Council (ALEC).

For example:

If states had just kept their spending growth the same as population growth plus inflation between 2002 and 2007, they could have maintained all their services and still provided a $500 billion tax cut.

Political pressure, especially from government employee unions, is a big part of the reason why states do not have anything in reserve; state legislatures, for instance, have lavishly enhanced pension benefits, but state employees should have little confidence that the states will ultimately make good on those promises.

Only 9 percent of state pension plans have enough assets to be considered safe according to government standards.

Many state legislatures, unwilling to take on the well organized lobbies for government spending, have resorted to raising taxes on the rich. However, that will only exacerbate the boom and bust budget cycles, as Maryland's experience demonstrates, says ALEC:

Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income tax rate to 6.25 percent.

Already, Maryland has seen a one-third decline in tax returns from millionaire households; the rich have literally disappeared from the state tax collectors' sights.

Instead of the state coffers gaining the extra $107 million the politicians predicted, millionaires paid $257 million less in taxes than they did last year.

States like Utah, Colorado, Arizona, South Dakota and Florida are the top five ranking states in the ALEC-Laffer State Economic Competitiveness Index for 2010, and have policies that include lower taxes and less labor regulation. Such states have had population growth of 18.5 percent over the decade 1998-2008, while the ten lowest ranking states had population growth of only 5.2 percent over that period, says ALEC.